NCLAT Delhi: Absence Of GST Refund/ITC Claim In Demand Notice Or Form 5 By OC Can't Become Ground Of Default For CIRP U/S 9 Of IBC

Background Facts:

Orders for the supply of cement clinker were placed by Rashmi Cement Ltd (Operational Creditor) before Bhilai Jaypee Cements Ltd (Corporate Debtor) with payments being made in advance. The Operational Creditor claimed that the Corporate Debtor defaulted in the supply of the third rake for which it had made advance payments and also failed to refund the advance payment received by it.

As of 11.04.2022, the operational debt totaled Rs.1.96 crores with the principal amount as advance payment being Rs.1.83 crores and Rs.13 lakhs as interest amount @ 18% p.a. The Operational Creditor sent a Demand Notice under Section 8 of IBC to the Corporate Debtor and on subsequent default, it filed a CIRP application under Section 9 of IBC. NCLT Cuttak reserved the on 07.08.2023 on initiation of CIRP.

On 10.08.2023, the Corporate Debtor paid the entire amount of Rs.1.96 crores to the Operational Creditor via RTGS. On 11.08.2023, it filed two interlocutory applications before NCLT Cuttak to place on record all subsequent developments post-reserving of orders.

The Corporate Debtor, the appellant in the present case, has filed an appeal before NCLT Cuttak's Order dated 05.09.2023 which has admitted the CIRP petition.

NCLAT Verdict:

The NCLAT Delhi allowed the appeal and held that if no GST refund/ITC claim has been included in the Demand Notice under Section 8 of IBC or in Form 5 by the Operational Creditor, the same cannot become a ground of default on which CIRP under IBC can be initiated.

The Appellate Tribunal observed that showing defaulting is a sine qua non for initiating CIRP as per Section 6 of the IBC. This essential requirement to establish the Corporate Debtor's default applies to both Financial Creditors and Operational Creditors when initiating CIRP proceedings. Thus, unless there is an outstanding debt and a default on it, neither Financial Creditors nor Operational Creditors can commence CIRP proceedings.

NCLAT noted that if the Operational Creditor does not receive payment from the Corporate Debtor or notice of the dispute under Sub-section (2) of Section 8, he may file an Application under Section 9(1) of IBC. In the present matter, RCL did not receive any payment from the Corporate Debtor after service of Section 8 Demand Notice and therefore proceeded to file an application under Section 9 of IBC.

The NCLAT observed that on 09.08.2023, the Corporate Debtor communicated with the Operational Creditor proposing an amicable settlement to resolve the dispute by offering to repay the operational debt. Further, on 10.08.2023, the Corporate Debtor refunded Rs. 1.96 crores via RTGS.

However, the Operational Creditor argued that this refund constituted a unilateral settlement, which they did not agree to, as it did not account for the Input Tax Credit (“ITC”) dues. NCLAT observed that the Operational Creditor never requested any GST amount in the Demand Notice or CIRP application or during the adjudication process before the NCLT. Furthermore, the Corporate Debtor filed the GST return for March 2022 belatedly in June 2023, which resulted in the Operational Creditor being unable to avail themselves of the ITC amounting to Rs. 65.72 lakhs. Consequently, the Operational Creditor was denied the benefit of ITC.

The Appellate Tribunal observed that the purpose of IBC is to initiate CIRP when a debtor defaults on paying their debt, as defined broadly in Section 3(12) of IBC to include non-payment of the full amount, partial payment, or installment. However, if a creditor is attempting to misuse the IBC as a means to recover debt instead of following standard debt recovery procedures, this misuse must be prevented, as the IBC should not be exploited as an alternative avenue for debt collection.

The Corporate Debtor has settled the entire operational debt claimed by the Operational Creditor. Thus, no outstanding default exists. Additionally, the Operational Creditor did not include any GST amount in their demand notice or application, although they later clarified that it was omitted due to a delayed GST return filing by the Corporate Debtor. Since the GST refund and ITC claim were not initially included in the demand notice or application, they cannot serve as grounds for default to initiate the CIRP.

Thus, the Operational Creditor's attempt to initiate CIRP by introducing claims not previously mentioned in their filings suggests an intention to use the IBC for debt recovery purposes. Allowing such claims, which were not part of the original operational debt claim, to be considered during the appeal stage goes against the principles of the IBC. This practice undermines the essence of the IBC and should not be endorsed.

In conclusion, NCLAT set aside NCLT Cuttak's Order, releasing the Corporate Debtor from CIRP. However, the Operational Creditor is free to recover its dues before the appropriate legal forum.

Case Title: R.B. Singh and Anr. vs. Rashmi Cement Ltd. and Anr.

Case No.: Company Appeal (AT) (Insolvency) No. 1187 of 2023

Counsel for Appellant: Mr Abhijeet Sinha, Senior Advocate with Mr. Anupam Chaudhary, Mr. Sarvesh Mehra, Mr. Anil Dutt, Advocates.

Counsel for Respondent: Mr. Rishabh Singh, Mr. S. Shiva, Mr. Namit Singh, Mr. S.K. Singh, Advocates. Mr. Arjun Asthana, Mr. Sidhartha Sharma, Ms. Shalini B., Advocates.

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